The Real Winners Of The Global Economy: The Material Boys

By Joel KotkinMarch 06 2013

Appearing in:

Forbes.com

Something strange happened on the road to our much-celebrated post-industrial utopia. The real winners of the global economy have turned out to be not the creative types or the data junkies, but the material boys: countries, states and companies that have perfected the art of physical production in agriculture, energy and, remarkably, manufacturing.

The strongest economies of the high-income world (Norway, Canada, Australia, some Persian Gulf countries) produce oil and gas, coal, industrial minerals or food for the expanding global marketplace. The greatest success story, China, has based its rise largely on manufacturing. Brazil has been powered by a trifecta of higher energy production, a strong industrial sector and the highest volume of agricultural exports after the United States.

Things are really looking up for the material boys here in North America. Over the past decade, the strongest regional economies (as measured by GDP, job and wage growth) have overwhelmingly been those that produces material goods. This includes large swaths of the Great Plains, the Gulf Coast and the Intermountain West, three regions that, as I point out in a recent Manhattan Institute study, have withstood the great recession far better than the rest of the country.

Today virtually all the “material boy” states now boast unemployment well below the national average; the lowest are the Dakotas, Wyoming and Nebraska. Texas, the biggest of the U.S. material boys, boasts an unemployment rate around 6%, well below California (nearly 10%) and New York (8%). One key reason: While Texas has created over 180,000 generally well-paid energy jobs over the past decade, California, with abundant energy reserves, has generated barely one-tenth as many. New York, despite ample potential in impoverished upstate areas, largely has disdained developing its energy sector.

These realities contrast greatly with the conventional wisdom that with the rise of the information age, the application of “brains” to abstract concepts, images and media would come to trump the “brawn” of producers, a thesis advanced influentially in 1973 by Daniel Bell in The Coming of Post Industrial Society. More recently Thomas Friedman has cited the East Asian countries such as Taiwan and Japan as suggesting that a lack of natural resources actually sparks innovation and economic health, while too great a concentration generally hinders progress.

So how is it that the rubes, with their grease-stained hands, reeking of the smell of manure or chemical fertilizers, have outperformed the darlings of the information age? The answer lies largely in the forces that are reshaping the world. This includes, most portentously, rising demand for fuel, food and fiber in developing countries, notably in East Asia and Latin America.

In the past commodity-based economies suffered frequent cyclical recessions whenever a handful of wealthy consuming countries — the EU, Japan and North America — experienced a recession or slow growth. Now a set of new consumers are fuelling strong demand even when high-income countries tank; this is keeping prices up far more reliably than in the past. Of course, a major global economic catastrophe, or some new breakthrough in energy or agricultural technology, could bring prices down precipitously, but for the most part demographic trends seem likely to favor commodity producers over the coming decade or two.

Arguably the biggest surprise has been the United States’ strong advantages in the resource race. America has a far richer endowment of raw materials than its primary competitors, including the European Union, India, China and Japan. Only the Russian Federation is equally well-endowed: The Siberian periphery that was first conquered in the great period of Russian expansion between the 16th and mid-19th centuries remains one of the greatest resource regions on the planet and the base of that country’s economy.

Agriculture is perhaps the least appreciated of the new drivers of the U.S. economy. Farm exports have been surging; in 2011 the U.S. exported a record $135 billion worth of agricultural goods, with a net favorable balance of $47 billion, the highest in nominal dollars since the 1980s.What accounts for this boom? One key driver is China, which consumes almost 60% of the world’s soybean exports and 40% of its cotton.

Perhaps even more transformative has been the energy boom, largely sparked by new technologies such as fracking and deepwater drilling. This has transformed the Great Plains alone into the world’s 14th largest oil producer, roughly on a par with Nigeria and Norway. Unless stopped by regulatory constraints, this expansion may only be in its infancy. We can expect large increases in production not only in North Dakota; Texas’ Eagle Ford shale oil is expected to quintuple its daily production by 2014 . New finds in the Wattenberg Field north of Denver alone could contain more than a billion barrels of recoverable oil and natural gas, essentially matching the huge Eagle Ford or the Bakken Field in western North Dakota. Another find, the Green River formation in Wyoming, could contain an astounding 1.4 trillion barrels of oil shale.

The energy revolution already has been transformative in the material states. Between 2010 and 2011, according to an analysis by EMSI, all six of the fastest-growing job classifications were related to energy development. Since 2009 the industry, according to EMSI, has added some 430,000 jobs, with the largest share going to Texas, Oklahoma, and Pennsylvania.

Perhaps even more important, the expansion of the energy sector is galvanizing manufacturing, hitherto the weakest link in the material boy economy. The energy boom could create more than a million industrial jobs nationwide over the decade both to supply the industry and as a result of lower energy costs, according to a recent PricewaterhouseCoopers study.This new industrial economy is already evident in those parts of the country embracing the energy revolution, notably Texas, Oklahoma, Louisiana, Pennsylvania, and Ohio.

Some see the rise of the material boys as just another “bubble” soon to collapse. Derek Thompson at the Atlantic suggests that the North Dakota boom may have already crested. And to be sure, labor and infrastructure limits may slow the rate of growth compared to past years, but projections by JPMorgan Chase suggest that North Dakota will continue to enjoy GDP growth two to three times the national average for the next few years. And as for the labor shortages, help is also on the way; North Dakota now boasts the highest rate of domestic in-migration in the country.

To be sure, the material boys will face real challenges in the years ahead. The need to train skilled blue-collar workers — something the country has neglected for generations — presents a major challenge in places like Louisiana and Texas, where education levels remain below the national average, as well as the more literate but less populous Dakotas. Infrastructure needs like pipelines and electrical transmission lines will become more evident as production increases.

But even the most effete coastal denizens should appreciate what the rise of the “material boys” means for America’s future. The growth of basic industries also creates demand for high-end business services — everything from architects and investment bankers to data-miners, advertising, and public relations firms — concentrated in such places as San Francisco, Seattle, New York, and Boston.

But clearly the biggest beneficiaries will be the cities of the commodity belt, starting with Houston, the epicenter of the energy industry, as well as Oklahoma City, Dallas-Ft. Worth, Omaha, Salt Lake City and Denver. Rapid growth is even evident in smaller places in the Dakotas such as Sioux Falls, Bismarck, and Fargo.

Most importantly, the rise of the material boys expands the nation’s geography of opportunity in ways rarely imagined just a decade ago. It is a process that all Americans should appreciate and encourage.

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Kotkin has a striking ability to envision how global forces will shape daily family life, and his conclusions can be thought-provoking as well as counterintuitive. It's amazing there isn't more public discussion about the enormous changes ahead, and reassuring to have this talented thinker on the case. — Jennifer Ludden, NPR national desk correspondent